guest article investment strategy What in the world is infrastructure? The definition is crucial: if we don’t know what it is we’re talking about, there is no way we can confidently invest in infrastructure, writesJeffrey E. Fulmer

GOVERNMENTS ARE PROJECTED to spend Infrastructure assets are the physical structures, fa- electric power, fuel, transportation, and com- about three percent of the world’s GDP on cilities, and networks that provide essential services to munications are among the most fundamen- infrastructure in 2009 to meet the needs of the public. These assets include transportation struc- tal of societal services. Each of these services expanding populations and to desperately at- tures (roads, bridges, tunnels, railways, airports, and is characterised by expansive systems that link tempt to prop up crumbling bridges, highways, seaports), energy and utility companies, communica- supply and demand and involve intercon- water pipelines, and other system components. tion entities, and social services such as educational nected assets performing different functions The investment community is establishing facilities and hospitals (Chambers, 2007). and enabling the operability of their respec- evermore equity and debt investment vehicles tive networks. targeting global infrastructure. Yet, when some- Certain definitions have been so broad as to Primary infrastructure sectors certainly one mentions infrastructure, we reply out of include people as infrastructure. Reimut Jo- include electric power, oil and gas, potable necessity, “How are you defininginfrastructure ?” chimesen’s 1966 book, Theorie der Infrastruk- and waste water, transportation, and com- Attempts to define infrastructure have been tur, Grundlagen der marktwirtschaftlichen Ent- munications. A defensible, but less obvious made by national agencies, provinces and wicklung, focused on infrastructure’s role in list of sectors includes food and agriculture, states, municipalities, professional and trade the development of a market economy. He chemical, financial, and social infrastruc- organisations, the financial community, defines infrastructure as the sum of the mate- ture. Although embraced by the investment academia and, of course, dictionaries. Incon- rial, institutional, and personal foundations of community, social infrastructure is perhaps sistencies and sector-specific biases abound, an economy that contribute to realising the the most difficult to defend. Its physical but common threads run through the myriad assimilation of factor remuneration, given an components include schools, courthouses, of definitions. Nearly all mention or imply the expedient allocation of resources. Jochimesen prisons, and hospitals. Networks for these so- following characteristics: interrelated systems, uses the term “personal infrastructure” to en- cial assets, however, are almost entirely non- physical components and societal needs. compass the number and qualities of people physical and can be only loosely described by in the market economy. educational, judicial, penal, and health care Some sample definitions include: A practical definition of infrastructure is systems. Having understandably attractive sought that satisfies standard uses of the term investment characteristics that include long- The infrastructure supporting human activities by integrating the common themes of systems, term contracts and fee-based structures, so- includes complex and interrelated physical, social, physical assets, and societal needs. Addition- cial infrastructure is similar to other physical ecological, economic, and technological systems ally, a listing of primary infrastructure compo- assets that are broadly not termed infrastruc- such as transportation and energy production and nents is thought useful in assisting infrastruc- ture; e.g., church buildings, condominium distribution; water resources management; waste ture-related discussions. complexes, and entertainment venues. management; facilities supporting urban and These “systems” also attract investment and rural communities; communications; sustainable INTERRELATED SYSTEMS satisfy certain societal needs. resources development; and environmental protec- An electric power grid is a system of power tion (American Society of Civil Engineers, Infrastructure systems or networks of inter- plants, substations, power lines, and control 2009). related components are the analogous arter- centres that are more specifically described ies and veins attaching society to the essential as interconnected generators, transformers, The essential facilities and services that the economic commodities and services required to uphold transmission lines, buses, circuit breakers, productivity of a community or organisation de- or improve the standards of living. They are reclosers, protective relays, switches, voltage pends on. As a real return asset class, infrastructure often monopolistic in terms of local or region- control devices, distribution lines, and com- includes those assets that are involved in the move- al control of a good or service and typically puters. Each component or collection of com- ment of goods, people, water, and energy (Weisdorf, involve substantial capital investment. Pro- ponents (e.g., the varied subcomponents of a 2007). viding access to water supply and treatment, substation) plays its operability role through

30 infrastructure investor july/august 09 investment strategy guest article accepting inputs and yielding outputs. A sub- vessels; and commonly rail and/or barge of- these two characteristics by themselves do not station’s input is voltage at one level, and its floading facilities. adequately define the term. To be character- output is voltage at another level. ised as infrastructure, the networked assets must Natural gas systems encompass wells, gath- SOCIETAL NEEDS be designed to address a societal need. ering pipelines, sales meters, compressors, Infrastructure systems are costly and their processing plants, natural gas liquids (NGL) While interrelated systems and physical com- focus is not on individuals, segregated groups, pipelines, fractionation plants, transmission ponents are essential infrastructure traits, or independent companies, but on broader pipelines, control centers, market hubs, storage facilities, city gates, distribution pipelines, and a multitude of meters, valves, Sector Function Primary Components and emergency shut-off mechanisms. These ELECTRIC POWER Power Generation Coal Power Plants physical components are connected and in- Nuclear Power Plants terrelated to form a functioning system. Natural Gas Power Plants Hydroelectric Power Plants (Dams, Pump Storage, and Run-of-River) PHYSICAL COMPONENTS Fuel Oil Power Plants Dual-Fired Power Plants Alternate/Renewable Energy Power Plants Infrastructure assets, as defined herein, are Distributed Power Plants those physical links and nodes of networks. Back-up Generators Power Plant Substations They can be built, touched, enabled, or disa- Power Transmission Transmission Lines and Towers bled. The assets are like the individual links in Transmission Substations DC Converter Stations a physical chain that have shared-dependency Regional Control Centers on each other to provide an overall function. Power Distribution Distribution Lines Distribution Substations In the absence of redundant links or worka- Step Down Transformers rounds, a broken link weakens or disables a portion (if not all) of its associated infrastruc- OIL AND GAS Exploration and Production Offshore Drilling and Production Platforms ture network. Subsea Facilities The commodities that flow through the Permanent Onshore Drilling Facilities Wells (Production, Injection, Observation, infrastructure are not a part of the infra- and Disposal) structure system. Some physical assets rely on Oil and Gas Gathering Crude Oil Gathering Pipelines and Separation Gas Oil Separation Plants non-physical services; e.g., the transmission of Tank Batteries (Field Seperation and Storage) voice and data packets integral to communica- Crude Oil Lease Automatic Custody Transfer Units Gas Gathering Pipelines and Compressors tion networks. These “invisible components” Field Gas Processing Plants (Dehydration, Sweetening, are no more an infrastructure asset than is the and Nitrogen Rejection) electric power flowing through transmission Gas Sales Meters Oil Storage, Refining, Transport Bulk Storage Facilities (Terminal, Refinery, and lines, crude oil flowing through pipelines, or and Distriburion Pipeline Breakout) the influent flowing into a sewage treatment Offshore Mooring Systems Underground Crude Storage plant. Infrastructure systems and their physi- Refineries cal components enable the flow of commodi- Oil Main Pipelines and Interconnections Pumping Stations ties and services but can be either physically or Control Centers financially sensitive or insensitive to variations Truck and Rail Racks in the amount of commodities and services Natural Gas Processing, Transport, Gas Processing Plants and Storage NGL Fractionation Plants being conveyed. Gas Transmission Pipelines and Interconnections Supporting components are integral to Transmission Compressor Stations Control Centers each of the primary infrastructure compo- Natural Gas Market Hubs nents. As an example, a seaport usually in- Natural Gas Storage Facilities City Gates and Distribution Pipelines cludes most, if not all of the following sup- LNG Trains and Regasification Facilities porting infrastructure components: wharfs, LPG/Propane Interconnected Assets berths, warehouses, fixed cranes, container yards, fuel storage tanks and pipelines, weigh- ing machines, conveyor belts, and railhead. POTABLE AND Water Supply, Storage Raw Supply Assets (River, Lake, Spring Inlets, WASTEWATER and Treatment and Wells) A natural gas liquids fractionation plant in- Raw Water Storage Assets (Reservoirs and Tanks) cludes a control center; pipelines; manifolds; Desalination Plants Water Treatment and Filtration Plants chillers; demethaniser, deethaniser, depro- Finished Water Storage Assets (Towers, Clearwells, paniser, and debutaniser columns; storage and Standpipes)

july/august 09 infrastructure investor 31 guest article investment strategy

society. A family’s home is likely the most im- not shared by the surrounding community. A for everyone in a community and demonstrate portant structure to them, but it lacks scale, company’s key facility may be of some concern convergence of their shared reliance. societal dependency, and it is not a compo- to people beyond just the company’s owners Society’s dependency on infrastructure is nent of a network. A company does well to and employees, but it cannot compare to the most clearly evidenced in the aftermath of analyse its critical systems and infrastructure local residents’ shared dependency on local service disruption. For example, Hurricane dependencies, but this, too, is a myopic use electric power and water distribution systems. Katrina caused severe infrastructure damage of the term and represents a set of priorities These essential systems rank high in priority along the US Gulf Coast when it made landfall in August 2005. Electric power, oil and gas, wa- ter, transportation, and communication serv- Sector Function Primary Components ices were all disrupted and commodity flow POTABLE AND Water Delivery Water Tunnels impacts were felt along the entire East Coast WASTEWATER Aqueducts and parts of the Midwest, with the financial im- (CONTINUED) Transmission Mains Pumping Stations pact even more far reaching. Pipeline Interconnections Infrastructure needs are especially pro- Distribution Mains Service Pipelines nounced in emerging economies whose citi- Control and Monitoring Stations zens struggle to gain access to even the most Wastewater Collection, Sewer Inlets and Mains (Sanitary, Storm and basic life-supporting commodities and serv- Combined) Treatment, and Discharge Influent Storage (Tanks, Pits, Ponds and Basins) ices. Beyond the developed world’s need to re- Waste Water Treatment Plant place or repair crumbling infrastructure, these Pumping and Discharge Facilities Control and Monitoring Stations countries need to build systems to initiate serv- TRANSPORTATION Road Transport Roads and Highways (including Toll Roads) ice in rural areas and vastly expand service in Bridges (including Toll Bridges) their growing urban communities. Tunnels (including Toll Tunnels) Operations and Traffic Management Centers Border Crossing Facilities CONCLUSION Truck Terminals Rail Transport Rail Cars (Freight and Passenger) Tracks Encompassing all things to all people is hardly Bridges a useful way to define infrastructure – clouding Tunnels Yards investors, governments, and their citizens’ abil- Passenger Stations ity to understand, advocate, and direct capital Operation Centers toward durable, networked assets with wide- Waterway Transport Locks and Canals Dams spread societal benefits. Primary infrastructure Docks components are generally monopolistic in na- Navigation Facilities Sea Transport Seaports (Shallow and Deep Draft) ture and require large financial commitments Air Transport Airports (Certified, Non-Certified, and Military) for their development, repair and replace- Airstrips and Airfields Heliports ment. They can be built, touched, enabled, dis- Spaceports abled, and function together to form interre- Air Traffic Control and Navigation Facilities lated, dependent systems that deliver needed Mass Transport Subway Systems Commuter Rail Systems (Heavy and Light Rail) commodities and services to society. In doing Bus Systems so, they facilitate economic productivity and Tramway and Ferry Systems promote a standard of living. Infrastructure can COMMUNICATIONS Wireline Services End Office Switching Facilities Access Tandems then be more concisely defined as The“ physical Cables (including Submarine Cables) components of interrelated systems providing com- Submarine Cable Landings Telecom Hotels modities and services essential to enable, sustain, or Interexchange Carrier Points of Presence enhance societal living conditions.” ¥ Carrier Data Centers Internet Service Provider Points of Presence Internet Service Provider Routers Jeff Fulmer is a Senior Investment Analyst with Tortoise Cable Services Cable Broadcast Provider Headquarters Capital Advisors, headquartered in suburban Kansas Headend/Distribution Hubs Cables City, Kansas. In addition to having held senior manage- Wireless Services Cell Towers ment positions with several oil and gas industry firms, Base Transceiver Stations Base Station Control Stations he was employed by the US Department of Defense from Mobil Switching Offices 2002-2007, where he headed a group of infrastruc- Broadcast Services Television/Radio Network Headquarters ture analysts covering multiple infrastructure sectors Local Broadcast Centers Transmitter Sites and engaged globally in critical infrastructure analysis, Data Processing/ Data Centers assessment, and protection. Network Management Operation Centers 32 infrastructure investor july/august 09